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Bear Market For U.S. Wheat Getting Worse

Chicago — U.S. wheat farmers are enduring torrential spring rain after last year’s drought, reducing their share of worldwide exports to a near-record low as rising global supply drives prices into a bear market.

Shipments will fall to 17.6 percent of global exports in the 12 months through May 2014, compared with 20.3 percent in 2013 and the all-time low of 17.5 percent in 2010, the Department of Agriculture estimates. The domestic crop is contracting for the fourth time in five years, and expanding harvests from Canada to Russia are curbing the dominance of U.S. growers, who accounted for half of sales in 1974.

Prices tumbled into a bear market in January and ample supplies will send futures traded in Chicago down an additional 11 percent to $6.25 a bushel in six months, Goldman Sachs predicts. That will threaten farmers’ profit in the U.S., where winter wheat in the southern Great Plains was damaged by the worst drought since the 1930s Dust Bowl before too much rain delayed northern spring-wheat planting. U.S. farm income rose 14 percent to $128.2 billion last year as prices surged and insurers made record payouts for ruined fields.

“It’s not as rosy as it was last year,” said Gary Millershaski, who saw drought destroy about 450 of the 2,800 acres of hard, red winter wheat he grows 21 miles west of Garden City, Kansas. “We don’t get to set our prices. We just take what the market delivers. Worrying about prices would eat you up. It’s hard enough worrying about the weather.”

Prices tumbled 26 percent on the Chicago Board of Trade since reaching an almost four-year high of $9.4725 on July 23. This year’s 10 percent drop compares with a 5.1 percent retreat in the Standard & Poor’s GSCI Agriculture Index of eight commodities. The MSCI All-Country World Index of equities gained 8.4 percent, and a Bank of America Corp. index shows Treasuries lost 1.1 percent.

Global wheat production will jump 6.9 percent to a record 701.1 million metric tons in the year that began on June 1, exceeding the 3 percent expansion in demand to 694.1 million tons, the USDA said May 10. A 6.6 percent increase from Canada, the second-largest exporter, and gains of 48 percent in Russia and 40 percent in Ukraine compare with a 9.4 percent drop in the U.S.

Combined exports from all suppliers will rise 4.3 percent to 143.32 million tons, even as U.S. shipments contract for a third year, down 9.8 percent to 25.17 million tons, according to the USDA.

Hedge funds and other large speculators held bearish bets on prices every week this year, U.S. Commodity Futures Trading Commission data show. As of May 28, the net-short position was 36,167 futures and options, 31 percent more than the average since the start of January.

The risk of further crop damage may revive prices. While the drought is over in most of the U.S., winter-wheat fields sown in October remain parched in western Kansas, Oklahoma and Texas, where farmers may begin harvesting by the end of June. Production of winter varieties, which accounted for 72 percent of the crop in the past season, will drop 10 percent this year to 1.486 billion bushels, including a 23 percent plunge in hard, red winter wheat grown in the Plains, USDA data show.

As of May 28 in Kansas, 48 percent of the state was in extreme or exceptional drought, meaning crop losses are inevitable or already occurred, compared with less than 0.1 percent a year earlier, the Lincoln, Nebraska-based U.S. Drought Monitor reported. Oklahoma was at 27 percent, compared with 3.5 percent a year earlier.

Spring-wheat planting has been delayed by rain, with about 80 percent of the anticipated acreage sown by June 2, compared with 100 percent a year earlier, according to the government. Rainfall in North Dakota, the largest grower, was six times the average in the past month, National Weather Service data show. The harvest is mostly in September. Iowa had its wettest April and May in records going back to 1873, according to Harry Hillaker, the state climatologist.

The International Grains Council in London raised its forecast for global wheat production to 682.1 million tons on May 31, 2.2 million tons above its April estimate. The agency predicted bigger stockpiles and said world trade will shrink as importers and exporters harvest more grain.

Lower wheat prices are helping to contain global food costs, which the United Nations says have risen for three consecutive months, the longest expansion in about a year. The Rome-based Food and Agriculture Organization estimated the annual worldwide food-import bill at $1.14 trillion in November.

Costs for some buyers may not drop immediately because they usually lock in future supply. Grupo Bimbo SAB, based in Mexico City and the largest bread maker, hedged its wheat purchases through September, Chief Financial Officer Guillermo Quiroz Abed said on a conference call April 26. While overall commodity expenses for Dunkin’ Brands Group Inc. franchisees will be flat to lower this year, wheat will be unfavorable, Chief Supply Officer Scott Murphy told investors May 7.

Improving weather conditions and more planting after last year’s jump in prices are boosting supplies from Canada, Australia and Russia, the three biggest exporters after the U.S., according to the USDA. The 27-nation European Union will probably reap 138.8 million tons when the harvest starts in July, 5.1 percent more than last year. Nations in the former Soviet Union, including Ukraine and Kazakhstan, will boost exports by 43 percent, the USDA predicts.

Wheat exports from Russia, where output will jump to 56 million tons from 37.7 million, fetched $270 a ton on May 31, less than the $330 for U.S. grain at ports in the Gulf of Mexico, according to Matt Ammermann, a London-based analyst at INTL FCStone. U.S. export prices dropped 11 percent this year.

Importers also may avoid U.S. wheat after a farmer in Oregon found an unapproved, genetically modified strain growing in his field. Japan, the biggest buyer behind Mexico, suspended imports of western-white wheat and feed wheat from the U.S., while South Korea increased import inspections. Scientists said the rogue grain was a strain tested from 1998 to 2005 by Monsanto Co., the world’s top seedmaker.

Record corn and soybean crops also may keep prices in check by reducing demand for wheat in livestock feed. After wheat’s premium to corn surged to $1.685 a bushel on May 23, the most since February 2011, the spread probably will narrow to 70 cents in the next several months, said Frank Cholly, a senior commodities broker at RJO Futures in Chicago.

While rain delayed spring crops in the U.S., they helped improve winter-wheat varieties grown east of the Mississippi River. Production of soft, red winter wheat will jump 19 percent to a six-year high of 500.9 million bushels (13.6 million tons), the government predicts.

North Carolina, the biggest producer of the variety, had 70 percent of its crop rated good or excellent on June 2 by the USDA. That compares with 7 percent in Texas and 11 percent in South Dakota.

The extra production will only partly compensate for the slump in futures because not all farmers locked in prices. CBOT futures for December delivery, after the harvest, are trading at $7.24 after having peaked at $9.13 in November.

“There will be some fields that will be the best we’ve ever had,” said Jeff Scates, 42, who helps farm 1,200 acres of soft-red winter wheat near Shawneetown, Ill. “I could’ve sold wheat for $8. Now I’ll be lucky to get $7.”